Real Reasons for the current Stock Market Rally

Since mid-April 2013, the stock markets are going up. Whilst US Fed Chairman has warned about the bubble formation on 8th May 2013, the markets continue to ignore him.

As we hear during the bubble formation the market pundits and bulls says 'this time it is different'. If we notice, the stocks that participate in the rally are few.

At least in Indian context (to a great extent applicable in the USA) most of the stocks are not participating in the increase in stock prices. Only those stocks listed in index are moving up.

What are the reasons for the rally? Whilst the bubble formation is evident and there are lot of justifications, Financial Thoughts believe that the major reasons include the following:

1. It is evident that the financial and commodity markets in the world are controlled by a few power entities based in the west. The commodities may be produced in Asia or Africa or South America - but the price of major commodities is still fixed mostly by the traders in the West as in 19th century. They have powerful media backing them up - who throw out articles for world consumption. For instance, the newspapers and other media still rely on mostly Reuters or Bloomberg.

2. A few institutions and powerful people in the West decides which financial assets or commodities to rise in the next year and they invent reasons. For instance, they said Gold is good for uncertain times and they promoted gold to new heights - entire world participated in the chorus. However, was it uncertain times? Ask Warren Buffet and similar investors who did not even bought an ounce of gold - now the same people who have promoted the gold has turned bearish all of a sudden & they have shorted it and profiting on its fall. Well - the media around the globe is spinning stories why Gold is a bad investment.

3. After ditching the Gold, the funds has to find some investment opportunity. They turned to Equities. They also fear that if the Fed increases rates, then bond prices will crash - so they are also selling bonds - and they have a problem of where to invest. They are not happy with US treasury rates. So they have decided to create a bubble in equity markets. And this bubble will get over and the media will write stories how fools got into the bubble and got themselves destroyed!!

One of the common patterns observable in these manipulated market is that there is an inevitable jump in the equity index towards the end of the session. Even if the market is flat, during the last 20 minutes some of the index stocks - especially those with higher weightage - to the index will move just to show the public the 'manipulated rally' is still on.

This is very true in Indian situation. The fundamentals haven't changed much and the oil prices are still high - recent current account deficit has increased. Moreover, Indian rupee is depreciating  against dollar, which will result in imported inflation.

Although they say WPI is reducing, this is stated to be "'a managed number" by changing the mix within it. Ask Indian consumer who will say that he is experiencing price increase across the board - this is not a surprise. Since India is adding a population equivalent to Australia every year, the demand for all items - especially food - is on the rise. Any rumour of lack of monsoon or lower agriculture production sends the prices high. No wonder food inflation is around 10% - and big surprise that the WPI is still dropping.

Let the investors be warned - don't be hyped by the media or the FII driven rally. All FII hope to sell the stocks and indices at high prices to Indians directly or indirectly (read mutual funds, etc) and make their money and get out.




 

An Interesting Indian Story -

One of my friends has recently emailed me a story . Hence, the authorship belongs to someone else. Since it is interesting I am hosting it in this blog. 

Ant & Grasshopper

The Ant works hard in the withering heat all summer building its house and laying up supplies for the winter.

The Grasshopper thinks the Ant is a fool and laughs & dances & plays the summer away.

Come winter ,the Ant is warm and well fed. The Grasshopper has no food or
shelter so he dies out in the cold.

Indian Version

The Ant works hard in the withering heat all summer building its house and
laying up supplies for the winter.

The Grasshopper thinks the Ant’s a fool and laughs & dances & plays the
summer away.

Come winter, the shivering Grasshopper calls a press conference and demands
to know why the Ant should be allowed to be warm and well fed while others
are cold and starving.

NDTV, BBC, CNN show up to provide pictures of the shivering Grasshopper
next to a video of the Ant in his comfortable home with a table filled with
food.

The World is stunned by the sharp contrast. How can this be that this poor
Grasshopper is allowed to suffer so?

Arvind Kejriwal stages a demonstration in front of the Ant’s house.

Anna Hazare goes on a fast along with other Grasshoppers demanding that
Grasshoppers be relocated to warmer climates during winter.

Amnesty International and EU criticizes the Indian Government for
not upholding the fundamental rights of the Grasshopper.

The Internet is flooded with online petitions seeking support to the
Grasshopper (many promising Heaven and Everlasting Peace for prompt support
as against the wrath of God for non-compliance) .

Opposition MPs stage a walkout. Left parties call for ‘Bharat Bandh’ in
West Bengal and Kerala demanding a Judicial Enquiry.

CPM in Kerala immediately passes a law preventing Ants from working hard in
the heat so as to bring about equality of poverty among Ants and
Grasshoppers.

BJP wants Sonia Gandhi’s apology.

Pawan Bnasal in Rail budget allocates one free coach to Grasshoppers on

all Indian Railway Trains, aptly named as the ‘Grasshopper Rath ‘.

Finally, the Judicial Committee of SC drafts the ‘ Prevention of Terrorism
Against Grasshoppers Act’ [POTAGA], with effect from the beginning of the
winter.

Kapil Sibbal makes ‘Special Reservation ‘ for Grasshoppers in Educational
Institutions & in Government Services.

The Ant is fined for failing to comply with POTAGA and having nothing left
to pay his retroactive taxes, it’s home is confiscated by the Government and
handed over to the Grasshopper in a ceremony covered by NDTV.

Arvind Kejriwal calls it ‘A Triumph of Justice’.

Baba Ramdev calls it ‘Socialistic Justice ‘.

CPM calls it the ‘Revolutionary Resurgence of the Downtrodden ‘

Obama invites the Grasshopper to address the UN General Assembly.

..
..

Many years later…

The Ant has since migrated to the US and set up a multi-billion dollar
company in Silicon Valley ..

100s of Grasshoppers still die of starvation despite reservation somewhere
in India …
As a result of loosing lot of hard working Ants and feeding the
Grasshoppers, India is still a developing country!!!

GOOD NEWS - RBI CUTTING THE RATES & INDIANS REDUCE THEIR GOLD CRAZE

Finally the wholesale inflation in India is below 6%. Some critics say that this is nothing but a ‘managed’ inflation reduction by changing the reference data. It is ok to do so as long as it is not a blatant invention. Those who know how company’s announce earnings know that there is some earning management. Hence, when a sovereign releases its earnings equivalent economic data, some management is acceptable. Another bunch of critics say that these figures are related to wholesale prices & not the consumer prices. They point out that the consumer price index may still be above 10%. Well, what we want is rate reduction from RBI and if the reduction in wholesale inflation will help to achieve that, we ought to welcome it. Hopefully, consumer inflation will reduce in due course.

How much RBI will cut the rates on 3^rd May 2013? Stock market has rallied – Nifty has nearly touched 6000 level despite poor earnings by some corporates and low Indian growth rates. Some die-hard optimists predict 0.75% cut, a few brokers expect 0.50% cut while bankers such as Barclays, RBS predict 0.25% cut. Financial thoughts believe 0.25% is more reasonable as RBI has already reduced the rates by 1% already.

Will the markets zoom further? It all depends also on political risks- the mother of all risks!. It is a fact that UPA is a minority government and relies on outside support-which can be gone in day or two.

Ever since humans invented ‘private property’ encroachment of neighbours property exists and a form of greed. China is no exception as it clandestinely entered into Indian Territory.  They do it with all their neighbours – Vietnam, etc. China’s economic encroachment has left millions unemployed in several countries; however China did supply cheaper goods by ensuring that a significant portion of their own population worked under conditions of ‘near slavery’ or bonded labour. Whilst China’s economic encroachment is acceptable in the spirit of competition and capitalism, the border encroachments cannot be justified in any manner.

Any escalation is border-dispute with China and mini war could be yet another risk-well a sort of ‘black swan’ risk. Probability of this happening is negligible; but impact would be severe.

Indians Loose Billions in Gold

Forbes recently reported that hedge fund gurus John Paulson and David Einhorn who invested heavily into gold has lost more than USD One billion when the gold price became bearish during mid-April spooked by fears of sale of gold by Cyprus bank.

No one reported how much Indians as class of investors lost in this gold debacle. During the last one year, whenever I met Indian businessmen who frequents between Dubai and India, they mentioned the craze of Indians for gold. They lost trust in real estate (due to several scams), stock market and chit funds (again there are several scams). So the funds were flowing into gold. Even RBI or similar authorities have come out with a report saying that Indian bank deposits recorded slower growth because Indians pumped money into the gold instead. The result was that Indians imported gold in tons – over the last couple of years, Indians imported and horded gold worth USD 120 billion. So, Indian investors might have lost more than USD 10 billion when the gold prices tumbled sharply.